Making Sense

  Federal Reserve Rate decision The overarching theme of the FOMC was price stability and that Federal Reserve would like to see compelling evidence that inflation is moving down, consistently with the 2% inflation target. That would mean a restrictive stance of monetary policy, growth below trend, improved demand supply balance of the labor market. On Sep 21, 22, FOMC raised the Fed funds rate by 75 bps to 3.00 - 3.25%. The committee marked down the GDP projections by 200 bps into 2023, increased expected inflation estimates by 20 bps into 2023 and shifted the terminal rates estimate higher to 4.625% from earlier 3.75%.  The table below captures the change in Fed funds target rate estimates since 2021. The table below implies 125 bps of rate hike in the next 2 policy meetings in Nov and Dec and another 25 bps of rate hikes into Q1 of next year. The market is now pricing 4.67% peak rate by May 2023 and thereafter 33 bps of rate cuts into the Q4 2023.  3.125% ...

The Liquidity Update: The liquidity surplus has turned flat as per the  Money Market Operations report as on Sep 19, 2022. Liquidity surplus has shrunk to 294 crs after the advance tax outflow. The Durable liquidity surplus stands at 342k Crores ( Sep 9, 2022). As the government spends money, the system liquidity surplus will improve. As the liquidity surplus has shrunk, the o/n rates have shot up with o/n call rate touching a high of 5.80% and Cash tom points trading at 0.80 ps. OIS Rates have similarly inched up as global central banks* tighten monetary policy.  1Y OIS 6.75% ( Resistance - 6.88% - 6.95% and then 7.05%) 5Y OIS 6.74% ( Resistance - 6.75% and 6.88% - 7.00%) *  Riksbank hikes its Rate by 100bps to 1.75%.  Inflation continues to be single most important item for CBs. Data released shows  German Producer Prices YY (Aug) rose 45.8% vs. Exp. 37.1% (Prev. 37.2%), MM (Aug) 7.9% vs. Exp. 1.6% (Prev. 5.3%) Whether we get further upside on rates ...

  The Trajectory of interest rates in India is likely to be predicated on the movement of the currency more than the inflation numbers. Inflation appears to have peaked in April 2022 and has declined subsequently. It is likely to trend lower in the coming months - sticky around the 7% level in the months of Aug and Sep and then start declining towards 5.80% in December. I’m generally guided by average of 10y historical mom spreads to outline the trajectory. The risk to inflation come from spike in prices of paddy (10%) and pulses (2%). Liquidity – Liquidity surplus stands at 84K crore ( LAF ) as on aug 17, 2022. The system has a durable liquidity surplus of 464K crore. LAF + Government Cash balance equal durable liquidity, hence government cash balances stand at 380K Crore. The LAF number would improve as RBI starts spending. In the months ahead till December, CIC leakage is estimated at 110K crore - 3% - 3.50% on account of currency leakage during festival season and 2 state...